Too many get caught up in believing that any additional pay to employees is inherently costing the company more and should be avoided at every turn. If you believe this is the case, there is something you are overlooking. What may be lost is that when the total volume (productivity and sales) is increased, the added gross margin dollars to the company’s daily intake should far outweigh any perceived increased wage or bonus payout. Just review the gross margin dollars per labor hour ratios and if there is truly a gain in productivity, the gross margin dollars per labor hour will increase dramatically. The actual labor cost per sales dollar will drop, not increase. Investing in greater productivity through an effective incentive program is no different than investing in equipment that increases productivity.
Most would agree that it is wise to implement an effective incentive program (IP) that actually increases productivity and lowers costs. However, very few companies have implemented such an IP, especially one that affects every group within an organization, including production, design, sales, and support. TDC has found that the vast majority of IP productivity programs are not positively affecting their sales the way most GMs believe. This article highlights the key aspects of implementing an IP for all groups.
Effectiveness is Key — I must reemphasize the word “effective.” An IP is not effective if it does not actually increase productivity and lower costs on a consistent basis. According to industrial engineering consultants Mitch Fein and Fred Myers, most companies experience a more than 42% gain in productivity by properly measuring productivity, setting realistic goals, taking corrective action in response to unacceptable practices, and rewarding individuals. Fein and Myers emphasize that, if normal level output consistently equals an average value, anything beyond that value should split the cost of labor evenly between the employee and the company. For every dollar saved, 50 cents should be distributed to the employees and 50 cents should be saved for the company. Three things happen at once: The company’s costs are lowered, its total volume is increased, and the employees are rewarded for exceeding the average productivity level. Every company administrator should desire this mutually beneficial situation because it reduces the cost of labor and helps increase sales due to higher productivity. The other shocking aspect is that even if you gave back to the employees all the labor dollars saved, the gains in additional gross margin dollars would still make it worth the perceived additional labor cost expense.
Do Not Base on Large Groups — To motivate individuals to exceed the average output, one must keep in mind the individuals’ perspectives. Common sense indicates that an individual has a greater influence over one worker’s output than over that of a large group. Why would anyone believe that having a large group in the same IP pool would give an individual much influence? (1 of 30 vs 1 of 3)? You’re only fooling yourself if you think this does not have a big influence on the end results. Smaller groups have greater impacts on each group members’ motivation and effort.
Time the Payouts —The actual payout needs to occur on a timely basis so that the employees link the reward to the immediacy of their efforts. A once-a-year profit-sharing program does not influence daily output and should not be considered an IP. TDC suggests that IP has a meaningful effect when hourly employees are paid once per month and salaried employees may be paid monthly or quarterly.
Units of Measurement are Essential — Proper measurements are the hardest aspect of IP for most companies to tackle. Without proper, reliable measurements, your IP will fall apart before it begins. Always reward the behavior that you wish to influence. For each group, here are the measurements that TDC recommends:
- Production – Use man-minutes, R.E. or S.U.—nothing else! BF and piece counts do not work consistently for roof truss manufacturing. For further explanation, please see http://todd-drummond.com/time-standards/.
- Sales – Use gross margin dollars (sales minus direct costs = gross margin). Why reward salespeople if the company does not gain from a sale? A sales commission and an IP are actually the same thing, but TDC recommends that they be based on gross margin, not total sales.
- Design – Generally, management has the most difficulty agreeing with what TDC recommends in this category, but if a company wants its designers to be properly motivated and to lower the direct cost of manufacturing, shop labor, and materials, designing prior to manufacturing is critical. Reducing costly errors should also be considered. TDC recommends a commission based on the total gross margin dollars the designer has created. More accumulated gross margin in dollars indicates greater output and reduced direct costs. (It’s simple.) A designer can save a company tens of thousands of dollars simply by properly optimizing each truss design, but optimization is always the first thing a designer forgoes when pressed for time.
- Support – Regardless of which individuals your support personnel are helping, this team shares in the actual incentive payout of the supported group. A simple flat percentage of that group’s payout works fine in most cases. Again, do not lump every support group together.
These are the basics of an effective IP that has already been used successfully in many component companies. If you think that IP is too difficult to maintain, if you have tried it unsuccessfully in the past, or if you need to implement other practices before you can implement an IP, allow TDC to remove all these superficial barriers. An effective IP should be part of every company’s ethos, as it can lower costs, increase capacity, and build better employee relations.
The TDC is your best source for learning about proven and practical lean manufacturing best practices combined with industrial engineering principles to keep your company at the leading edge of competitiveness. No one is better at providing your team with proven results for good employee practices, pricing, truss labor estimation, and so many other best-in-class practices. TDC’s tailored solutions are for the client’s specific needs. Go beyond the typical software and equipment vendor recommendations for your operations and do what many have dared to do. Embrace the Drummond Method, and your company can experience cost savings, and net profit gains that usually take months or years can be accomplished in weeks or months, resulting in an average of 3 to 6 point net profit gains for CMs. All areas are addressed, not just manufacturing. Please do not take my word about TDC’s services, though. Read the public testimonials many current and past clients with decades of expertise and experience have been willing to give: https://todd-drummond.com/testimonials/.
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